Insights

Finding a Home for the Fourth Money Laundering Directive

Last year the House of Commons published a report on proceeds of crime which made alarming comments in relation to money laundering. The findings of the report were that the processes in place in many real estate firms is insufficient. Evidence was heard that ‘at least a hundred billion pounds is being laundered through the UK every year.’ It was also written that ‘it is astonishing that just 335 out of some 1.2 million property transactions last year were deemed to be suspicious. This suggests to us that supervision of the property market is totally inadequate, and that poor enforcement has laid out a welcome mat for money launderers.’

On 26 June 2017, the Fourth Anti-Money Laundering Directive (4AMLD) will come into force. The intention of the 4AMLD is to strengthen the required processes that must be undertaken by regulated firms in order to prevent terrorist financing and anti-money laundering.

However before this can be implemented, the UK has to complete its own National Risk Assessment (“NRA”) to determine areas of higher AML risk in each regulated sector. Those affected will then be subject to mandatory customer due diligence (“CDD”) requirements, amongst other things. The NRA was began in September 2016 by means of a consultation process with respondent stakeholders in each sector. As part of this consultation process, the Treasury published the results, and its take on them, on 15 March this year. This makes for particularly interesting reading for the Estate Agent sector.

The first main change in the industry may be seen in a positive light, as it clarifies the treatment of letting agents. Despite the fact that most respondents supported inclusion of letting agents within the 4AMLD regime, the government itself has refused to support this based on a lack of material evidence. This has meant that pure letting agents are not subject to CDD requirements. Letting agents that deal with leases of capital value will be caught, however, as will letting agents which also handle estate agency matters (as defined in Section 1 of the Estate Agency Act 1979, as amended). This is not the end of the matter, as the government reserves its position and will update the NRA at the end of the year, once it has reviewed more evidence on risks associated with letting activity.

The second and most significant or controversial change, depending how you look at it, is that estate agents will be forced to carry out CDD on both the buyer and seller. This will have the unfortunate impact of doubling both the work and the cost. The rationale for supporting this change is the unique position that the estate agent has in encountering both the buyer and seller in a transaction, even though they may only represent one of the parties. As property is the most valuable asset type held by UK criminals. A buyer’s source of funds will be a key area of due diligence. CDD on the buyer should start at the point that they introduce money into the financial system. Of course this may be hard for some estate agents, if deposit money is for instance paid into a solicitor’s stakeholder account. There is also a risk that, depending on the size and nature of your business, there may be a requirement to have internal risk assessment policies tested. This could be carried out by through an audit by a regulatory body such as the HMRC.

My firm and I, Gordon Dadds, were recently instructed to make representations before the HM Treasury in the interests of those working in the estate agency sector, to oppose the increased onerous CDD burden, on the basis that it is neither a practical, nor effective solution, to resolve the issues which the 4AMLD allegedly seeks to alleviate. The consultation with the sector and the HM Treasury is ongoing in advance of the enforcement of the new directive.

The lowest impact change, brought by the 4AMLD, is the opening of the door for professional bodies to, themselves, supervise AML / counter terrorism financing (“CTF”). At present the HMRC acts as AML/CTF regulator for this sector, requiring AML registration with them. It will now be up to these bodies to demonstrate that they can come up to the standard of supervision required before the reins will be handed over.

In the light of the above, there are plenty of processes to put in place in short order and, as the old adage goes “there is no time like the present,” to complete a full review of risk assessments and internal policies. In the interim, before 4AMLD comes into force on 26 June 2017, you should remember that this new legislation requires that you:

Undertake a risk assessment for your business

Sign up to an online verification system to make CDD relatively painless

Seek evidence of source of funds

Test riskier transactions and targets far more deeply

Train your staff to see the warning signs

Appoint a money laundering reporting officer (“MLRO”) to document decisions and to reflect on how many suspicions they have officially reported in the last six months

Regularly monitor riskier clients

Seek advice when yours and the instincts of your staff are warning you

Ensure that you have a procedure in place for internal confidential reporting of suspicious activity to your MLRO and for them in turn to make decisions on reportable activity and submission of reports where necessary to the National Crime Agency

Keeping of records on CDD, transactional information and MLRO decision making and reporting for at least 5 years after the customer relationship ends

The message from the government is loud and clear. Criminals will always try and launder money, and the regulated sector, and property professionals alike, are the first line of defence to prevent the financing of crime. With this in mind, you need to be alert so that you are not caught out when the inspector comes calling.

Our Regulatory Solutions Team is made up of experts which have spent many years working both as lawyers and compliance directors in a variety of regulated industries as well as private practice, with a particular focus on AML, bribery and corruption in the Estate Agency sector. They can therefore help you prepare for 4AMLD in a practical and pragmatic way taking into account the constraints of your businesses.

Contact the Author

After reading law, politics and philosophy at the University of Hertfordshire, I qualified as a solicitor in 1997. In 2007, I went in house, specialising in risk, financial crime and regulation. I joined Gordon Dadds in 2012, before which I was senior counsel at BDO LLP.Recognised in the Legal 500, I advise and support clients on regulatory issues in sectors including accountancy, legal, property and gaming and on FCA authorisations. I help with anti-money laundering, sanctions, bribery and corruption, defence to investigations/responding to unauthorised visits and criminal/ civil aspects arising, as well taking the lead for Gordon Dadds' own ethics and risk management functions across Gordon Dadds Group plc. I am the MLRO, Head of Legal Practice and report to the board. Click here for more information.I have recently:

Acted as a 166 “skilled person” on appointment of the Gibraltar Financial Services Commission, dealing with a safeguarding issue and money laundering review

Helped a money transfer business with the FCA’s concerns over its activities and authorisations

Acted for a start-up tech company to obtain FCA authorisation

Worked with a property related business to obtain FCA authorisation as an AIFM

Advised a business on whether its activities fell under the definition of a collective investment scheme

Other matters that I deal with for clients are financial crime risk management strategies and technology solutions for the client on boarding process and lean process.